The Foundation Of The Stock Market Is Crumbling

The S&P 500 and Dow have gone nowhere since March 1st. The SPX had been bumping its head on 2400 until Wednesday. The Dow and the SPX have been levitating on the backs of five tech stocks: AAPL, AMZN, FB, GOOG and MSFT. AAPL alone is responsible for 25% of the Dow’s YTD gain and 13% of the SPX’s.  Connected to this, the tech sector in general has bubbled up like Dutch Tulips in the mid-1630’s. The Nasdaq hit an all-time high (6,169) on Tuesday.

But, as this next chart shows, despite a handful of stocks trying to rain on the bears’ parade, there’s plenty of stocks that have been selling off:

The chart above shows the S&P 500 vs the SOX (semiconductor index), XRT (retail index), IBM and Ford since the election. The SOX index was used to represent the tech sector. You can see that, similar to the culmination of the 1999-early 2000 stock bubble, the tech stocks are bubbling up like a geyser. IBM is a tech company but its operations are diversified enough to reflect the general business activity occurring across corporate America and in the overall economy. The retail sector has been getting hit hard, reflecting the general decay in financials of the average middle class household. And Ford’s stock reflects the general deterioration in U.S. manufacturing and profitability. Anyone who believes that the unemployment rate is truly 4.4% and that the economy is doing well needs to explain the relative stock performance of the retail sector, IBM and F.

Despite the levitation of the SPX and Dow, the “hope helium” that has inflated the stock bubble since the election has been leaking out since January 1st. While many stocks in NYSE are either below their 200 dma or testing 52 week lows, the price action of the U.S. dollar index best reflects the inflation and deflation of the Trump “hope bubble:”

I’ve always looked at the U.S. dollar as a “stock” that represents the U.S. political, financial and economic system. As you can see, U.S.A.’s stock went parabolic after the election until December 31st. Since that time, it’s deflated back down to below its trading level on election day. This has also been the fate of the average stock that trades on the NYSE. In fact, as of Friday’s close, 55% of the stocks on NYSE are below their 200 day moving average. Nearly 62% of all NYSE stocks are below their 50 dma. Just 4.37% of S&P 500 stocks are at 52-wk highs despite the fact that the SPX hit a new all-time high of 2402 on Tuesday. These statistics give you an idea of how narrow the move higher in the stock market has been, as the average stock in the NYSE/SPX/Dow indices is diverging negatively from the respective indices. The foundation of the stock market is crumbling.

The above analysis was a portion of the latest Short Seller’s Journal released last night. SSJ recommended shorting IBM in the April 23rd issue at $160.  It’s down 4.6% since then. The primary short idea presented in the latest issue was down 2.3% today despite the .5% rise in the SPX.  This idea is a stock trading in the mid-teens that will likely be under $5 within a year.  You can find out more about the Short Seller’s Journal here:  LINK

12 thoughts on “The Foundation Of The Stock Market Is Crumbling

  1. Talk about overvalued manias. I’m surprised that you
    have not Lampooned this insane crypto currency run up.
    It boggles my mind that a frigging Bit coin can be worth
    more than an ounce of gold. Is the food and water that is
    being consumed full of stupid pills ? Here is an article that
    capsulizes this insanity. As always I await your comment(s)
    on this particular, market?

    1. I reserve judgment about whether bitcoin is in a bubble but directly comparing it to gold is fundamentally flawed. It’s better to think of a bitcoin as a share in a company that does FOREX transactions and might grow to handle over 1% of all such transactions globally.

      1. Agreed it’s not the same as gold BUT it’s acting as a gold-surrogate at time when gold’s natural move higher in reaction to the rapidly geopolitical, political, financial and economic condition of the world – and especially that of the U.S. – is being restricted by the paper gold manipulation and price-capping of the western Governments/CBs. Bitcoin is not manipulated and price-capped in a futures market. Bitcoins is doing what gold would be doing in the absence of manipulation.

      2. I really like the way you described it, bobbybobb. The problem I see, long term, with cryptos is that unlike FOREX trading companies…virtually anyone can just start up their own crypto-currency in their bedroom. It’s things like that, coupled with the “wave of the future” slogans put forward by crypto-marketers, that convince me that what we’re seeing is a ponzi-scheme writ large.

        Unlike PMS, cryptos have no valuable non-monetary uses; their value is completely dependent on more buyers entering in than sellers exiting (and enough to offset the supply of competitors entering the market). Whereas for PM holders who faced price-drops could always re-purpose those PMs into other consumer goods (such as electronics, etc), once crypto “coins” fall in value according to their inherent usefulness (nothing)…late-comers will be left with virtually nothing to show for it. Kinda like fiat…except on steroids. Big rush…then POOF!

        That’s the threat as I see it at least…and why I stay the hell away from cryptos.

        1. > anyone can just start up their own crypto-currency

          Metcalfe’s law is heavily in play here. Anyone can start their own non-facebook social network right now, or their own incompatible data network that competes with the internet. Good luck with that. It’s just not how these things work. It’s winner take all. The larger network will always win. Entirely separately from Bitcoin, the idea behind ethereum to provide totally decentralized computing might be huge if it works.

          I do not own any crypto currency. It’s probably a big bubble. But the rants against the stuff are usually retarded.

  2. If the fed, Treasury, Plunge Protection Team, and other interested parties can’t stop a selloff [otherwise known as market crash], it is going to be ugly.
    I suspect though that this time they will stop stock market trading as many times a day and for as long as they deem necessary [even weeks] to slow it down. That would give them time to create currency out of thin air and/or ptherwise create liquidity. I have no idea how it works. I don’t know the rules, and they re-write them as they see fit anyway. The currency is largely imaginary as are the solutions.
    Some would say if they close the markets then people will lose the ability to sell and that’s not a free market. And they point is we have free markets?
    Most people reading this know more than me about money, currency, and finance, so I welcome comments.

  3. Dave I shorted the auto related co. from your last issue. It jumped today on their earnings report so I added to my position. By the closr had dropped two dollars. This thing is a dead man walking.

    1. I saw that it had closed red today after yesterday’s and this a.m.’s move up – I think you got a good entry!

  4. Blockchain is useful between trusted parties who want to avoid govt scrutiny and taxes as far as I can tell. Everybody and their dog is starting a crypto currency and maybe what we’re seeing is the decentralization of currency – nations will not have the control over money as they once did. I think the sentiment is pretty crazy now, but long term this technology will not be going away. The argument that the internet might get shut down is ludicrous – that genie will never go back in its bottle.

    1. Ah but nations do have control over any cryptocurrency – all the sovereign power has to do is cut the internet for “national security purposes.”

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